confused about H&BU

[andrew81]

1920's craftsman bungalow. sometime in the 70's one of the second level bedrooms was converted into a kitchen and the stairwell access was moved to the back porch. Property is overall dated with 1970's finishes but has been well maintained.

First floor: living, kitchen, bedroom, bath.
Second floor: living, kitchen, bedroom, bath

It is zoned multiple family which allows for single family.

Research of multi-family sales revealed no similar sales going back three years. There are 3 sales 6-7 year old single story duplexes. 1 sale of a 2 unit conversion that is more than twice as big and was in fair condition. 1 sale of a 7 unit apartment and 1 sale of a 4 unit apartment. Ive extended research into neighboring counties but did not find any similar sales.

Research of single family sales revealed 4 sales over the last 12 months which i would considered to be comparable; if the second level kitchen were removed and made a bedroom again.

Of course the client has requested "as-is".

what is so hard about an "AS IS" apprasial?

a part of testing the highest and best use as improved discusses modification of the existing use as improved. (appraisal of real estate 13th page 288) the conversion is physically possible, legally permissible, and financially feasible.

Is the highest and best use as improved (with modification)?

The actual use as of the effective date is 2 unit, but the modification would create a single family use. This is where im confused. How is the H&BU as improved but there are 2 different uses?

 

[Greenra]

Consideration of the ideal improvement is part of the HBU analysis. The ideal improvements is, “the improvement that takes maximum advantage of the site’s potential given market demand, conforms to current market standards and the character of the market area, and contains the most suitably priced components; the improvement that represents the highest and best use of the land as though vacant.” Dictionary of Real Estate Appraisal, 5th AI.

In determining a property’s Highest & Best Use appraisers analyze the property as if vacant and as improved. Each scenario considers legally permissible, physically possible, financially feasible, and maximum productive uses of the property. The two scenarios are then reconciled into an overall Highest & Best Use of the property with consideration given to any costs necessary to change the existing use. That is, changes to the existing use and/or improvements to achieve the maximum productive use cannot exceed the beneficial change in value. Otherwise, the changes would not be financially feasible and the existing use would represent the Highest & Best Use.

 

[Deleted member 128537]

I look at tends in the neighborhood first. For example are people converting single family homes to multi-family? Are more multi-family homes being built in the neighborhood than single family. Look at the number of multi-family properties listed relative to sales. That may help. If most homes are single family in the neighborhood with similar zoning, then I would stick with single family as HBU. In my years often the HBU issue is pretty obvious. Just because a property can be used as a duplex doesn't mean it should be. And I don't know why you would need to remove the kitchen. Can't a single family house have two kitchens? I know lenders hate it, but I see it all the time in our area.

 

[Terrel L. Shields]

Don't make it too hard. As if vacant = the ideal improvement and "As is" is "as is" and does not allow for, let alone require "modification"... So there are not 2 different uses "as is"...just the one currently in use.

 

[Paul Isolda]

The real question is, is the property at its highest and best use as improved? Which means, does the existing structure contribute to the total value of the property or would the property be worth more if the structure were removed? If the dwelling is contributing something, the property is at its highest and best use as improved. The highest and best use as vacant asks what would be built there if the site was currently vacant? The question, would the property be worth more "as is" or modified is not germane to either H&BU as vacant or H&BU as improved.

 

[George Hatch]

Just because you can't find comps doesn't mean the existing use is less valuable in that use than if converted back to SFR occupancy.

We perform HBU analysis as a means of identifying the typical buyers and their motivations, their alternatives in the market, and the units of comparison they're using to value such properties. That means that the operative question for a property with existing improvements is if it's worth more in its current occupancy, more as if vacant, or more as if converted to another type of occupancy. The latter two options are inclusive of whatever costs/incentives it would take to justify the removal or conversion of the existing use/occupancy.

Most of the time an existing residential use in serviceable condition will generally be more valuable than the underlying site value as if vacant, or as conversion bait for a different type of (legally permissible) occupancy.

As for your analysis, it might be helpful to remember that there's more than one way to develop a value indicator.

If you have other 2-3 units sales (even if not proximate) you can see what kinds of GRMs they're returning and apply that to the subject's income potential. That would seldom be the dominant indicator of value but it could be considered supportive of whatever else you're going to have to do with the Sales Comparison.